Monday, September 28, 2015

Economy: The Begin Of A Golden Epoch?

(Drivebycuriosity) - It seems that everybody is pessimistic. The stock markets are tanking and negative headlines rule in the media. But I think that the gloomy zeitgeist is ill-founded. I believe we might even be at the begin of a golden epoch.

The reason: Oil and other commodities are much cheaper than a year ago, interest rates are close to zero and the labor market is recovering. The situation reminds me of the mid 1980s. Then the oil price also collapsed and commodities stayed cheap through the year 2000. Cheap commodities in combination with falling interest rates and a technological revolution (Internet) lead then to a period of prosperity (with the exception of 1992 as the first Iraq war caused an oil price spike which lead into a mild and short-lived recession), the longest boom in U.S. history (factcheck). In this period the Dow Jones climbed from 1,000 points onto 10,000 points.

The Wall Street Journal compared the collapse of the oil prices in the 1985-88 period with the recent oil price crash (screen shot below wsj  the article may be behind a pay wall. If you copy the link into Google search it should function)

I think it is highly likely that we will experience another prosperous period like the epoch 1985 through 2000.  Oil and other commodities should stay cheap (oil price way below the $100 plus of the recent years) thanks to the technological progress which is reducing the costs of oil exploration significantly, amplifying oil production  (economics21). Advances in technology are reducing the costs for farming and mining as well. The demand for commodities should be restrained because cars and other machine are getting more energy efficient. The rising use of solar- and wind energy should also put a dent into the demand for oil.

Cheap commodities and the influence of the Internet (more competition, many services are for free) will curb inflation in the coming years. The Fed may soon hike her interest rates, but the raises will be moderate because of the curbed inflation.

Like in the 90s we also should get some tailwinds from the technological progress (Internet of things, cloud computing, 3D-printings, robotics and more driveby).

I think that the combination of cheap commodities, low interest rates and technological progress will fuel company profits and inspire consumer spending as they did in the boom from 1985 through 2000. Welcome to a new golden epoch!

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